Lazy Portfolios at war with Wall Street casinos

Commentary: 5 ways Main Street investors get manipulated, fleeced

SAN LUIS OBISPO, Calif. (MarketWatch) — There are 95 million Main Street investors in America. Want to buy stocks? You have no choice. You gamble your hard-earned money, actively trading retirement money at Wall Street’s casinos. You can’t win.

Smartphones may be making us dumb and dumber. But Wall Street casinos are making us the dumbest investors in history. Our brains can’t handle the daily onslaught of big data and manipulative casinos. So forgive your brain for forgetting.

So here’s a twofold update. First, an update on how the Lazy Portfolios are performing in early 2013. These portfolios are designed for the vast majority of Americans because all eight portfolios involve no active trading. They really are perfect for passive investors who hate giving away a third of their money to Wall Street casinos. Rebalancing is done when you add new money to your portfolio.

Lazy Portfolios, long-term winners beating Wall Street casinos

Lazy Portfolios are based on the Nobel prize-winning Modern Portfolio Theory strategy commonly used by professional portfolio managers. And they’re very simple: Well-diversified portfolios of just three to 11 no-load, low-cost index funds that cost you substantially less than what the casinos rake off the top of your returns.

Here’s an overview of the short-term and long-term performance of all eight as of last week:

Which portfolio is best for you? Most Lazy Portfolio investors start by researching all eight for a short while, tracking performance over time. Then they start investing their hard-earned money in the funds that seem to fit their needs.

Notice that over the longer-term Lazy Portfolios beat the market averages. Low-cost, no-load mutual funds expenses are about a tenth, while Wall Street casinos insiders skim a third.

Over time, investors tell us they better understand what investing is all about, for them. They often create their own hybrid Lazy Portfolio, possibly working in conjunction with other investing opportunities, like inherited assets you can’t or don’t want to sell or a 401(k) with limited choices. So, they personalize their own version of a Lazy Portfolio.

And that’s the real point: Lazy Portfolios get you thinking, they wean you away from losing a third of your money at the Wall Street casinos to investing in index funds. Away from Wall Street’s expensive retirement killers.

Your brain is your worst enemy, and Wall Street makes it much worse

Call it behavioral economics, brain science or just plain investor psychology, the fact is your brain is a brilliant computer, if you use it right. Most investors either don’t, or more likely, the Wall Street casino operators secretly hire thousands of high-priced behavioral-science experts who understand your brain’s quirky bias better that you. So, they help traders develop super-sophisticated computer algorithms that are virtually impossible for Main Street investors to win.

Get it? Not only is the investor’s brain overloaded and prone to forget too much, but Wall Street casinos are sabotaging your brain’s computing system with viruses and malware so your brain can’t think straight. In fact, the vast majority are losers who can’t even beat an index fund.

Yes, the games are rigged, the cards are marked, the house always wins, and yet the great American spirit drives us. Of course you have to ignore study after study proving that the vast majority of investors believe they are one of the rare above-average brains who can beat Wall Street casinos and market averages.

That dangerous brain virus was best captured in Garrison Keillor’s legendary Lake Wobegon in his “Prairie Home Companion” world where “all the women are strong, all the men are good-looking and all the children are above average.”

But to live in that fantasy, all investors must forget finance professors Odean and Barber’s famous studies that concluded, “the more you trade the less you earn.” And the casino behavioral experts know how easily you forget and how to take advantage of your weakness and biases.

So with all that imagery overloading your mind, let’s go inside the minds of several investors playing games trying to beat the house at the world-famous Wall Street gambling casinos. And, by the way, keep notes on how many of these five brain games fit you in the years since the run-up to the Wall Street casinos’ 2008 crash (that will soon repeat):

1. You are certain you’re rational, don’t have a big fat ego

You know you’re a winner in life ... got a great track record in my business ... follow gurus like Cramer and Kudlow ... track markets in the Journal ... go to seminars, read books on investment strategies, get lots of alerts on hot stocks ... can’t lose ... know how to beat the averages ... and totally confident the next pick is perfect. You’re different, you don’t fit the Lake Wobegon profile.

2. You read every book about Warren Buffett, now channel him

You’re convinced you really are market savvy, work hard to research the perfect winner, and as a result, you know you’ll discover the next Google. And that’ll put your retirement back on track. You’re convinced you’ll nail it next time. Remember you triple-checked everything for accuracy, then bought Farcebook. You’re still perfecting Warren Buffett’s system.

3. You invest with conviction, facts can be misleading or irrelevant

Once you’re totally convinced on a stock, nothing can change your mind. Facts to the contrary are irrelevant. Instead, they’re the fault of some dumb anchor, crooked managers or must have been old news about company sales. Not my brain. If signals screamed sell, sell, you hold to your convictions. Even double down. You trust your gut, not the data. After, you take your losses, go into denial, keep fighting. You know you’re a winner.

4. You’re a savant, saw the 2008 crash coming, won’t miss the next

Yes, you saw it coming, predicted it early. You never underestimate the risks out there, never overestimate your own skills. You just couldn’t act fast enough or stop listening to Paulson, stop the condo-flipping, like you couldn’t sell any dot-coms earlier. But now that you think back, you did see the crash coming, you just didn’t get out in time. But then you didn’t have much to lose. Still don’t. You’ll try not to let it happen again.

5. You follow the rules of the school of neuroeconomic risk-taking

A decade ago, Defense Secretary Donald Rumsfeld’s sage words described how to attack in war and in the stock market: “There are known knowns. These are things we know that we know.” There are also “known unknowns ... things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”

Yes, gambling on the markets is like war, you attack with the skills and the information you have, you take big risks like a big man. You can’t know everything. Things happen.

OK, that’s a sampling of what little rational thinking goes on in the minds of most Main Street investors. The American investor’s brain also forgets that Wall Street casinos have fallen behind the 30%-plus inflation rate since the new millennium. They’re losers. Plus their shenanigans triggered two market crashes, two recessions, two costly wars and trillions in debt.

And yet the investors’ brains agreed to bail them out. And will bail them out again. We never learn, our brains forget, locked in denial, as the Wall Street casinos keep getting richer skimming off our retirement money ... yes, our brains are your own worst enemy, worse than the casino’s collective brain.

And someday soon, when the casinos do implode again, and trigger another crash and depression, I hope you’ll have protected yourself against the next round of inflation-adjusted losses and the high debt the casinos keep forcing on Americans.

Until then, build your own Lazy Portfolio and get ready to play a tough defensive game through the coming depression.

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